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Should I file Chapter 7 or Chapter 13?

 

Sometimes the answer to this question is easy, but since the law changed in 2005 it has become increasingly common to have situations where there are factors that push people in both directions at the same time. Personally, I always start out by looking at Chapter 7, mostly because it costs a lot less than Chapter 13, and because it usually takes three or four months, as opposed to the five years that a Chapter 13 case typically takes in this district. But not everybody qualifies for Chapter 7, and anybody with a normal range of debt (more or less) can file a Chapter 13. More importantly, for people who have anything valuable, or who have done something recently that might cause problems in Bankruptcy Court, Chapter 7 can be very risky, while Chapter 13, on the other hand, is a very safe process. As long as you can make the required payments Chapter 13 won't cause you to lose anything that you would rather keep, and it's much less likely that anyone will pay as much attention to your recent financial transactions as they might if you filed a chapter 7.

There are two ways to qualify for Chapter 7. The first, and by far the most common, is financially. The second qualification is for people with mostly business debts (including taxes) as opposed to normal consumer debts. Business debt will discussed in another section.

To see if you qualify financially we add up all of your income and all of your reasonable living expenses (including payments on your house, car, and/or other things that you plan to keep, but NOT including debts that would be discharged), and compare those two numbers to each other. If your expenses are equal to or greater than your income, you probably qualify for Chapter 7. The next question is whether you might be in danger of losing something that you would rather keep. That is a much longer conversation, and will be covered in another section, but in a nutshell if you only have average belongings, and if you aren't behind on the payments for something that you want to keep, and if you don't own something that is worth thousands of dollars (over and above any outstanding debt on that item), then you probably aren't in danger of losing anything.

 

On the other hand, if there is money left over after doing that calculation, or if there is a danger of losing something important, then you are looking at a Chapter 13 (or possibly a Chapter 11 if your debts exceed $1,000,000.00). You can also be disqualified from Chapter 7 if you have filed another Chapter 7 within the past 8 years.

Note: Technically, you can file a Chapter 7 even if you don't qualify, but in most cases there's no point in doing that, because your case would either be dismissed or you would be forced back into a Chapter 13. However, there are times when there could be enough benefit from the automatic stay alone to justify filing a Chapter 7 even if you know that you won't receive a discharge. Those cases are rare, but they do happen, usually when you just need to buy some time for a few weeks.

We are seeing increasingly more cases that could go either way; Chapter 7 or Chapter 13. Every case has to be analyzed on its own before the decision can be made. Two people might have the exact same income, the same level of debt, and similar assets, and one might end up in a Chapter 7, and the other in a Chapter 13. Here is one example: Imagine that you are making payments on a new car that you bought last year. You are current on your car payments, but behind on many other debts. If you filed a Chapter 7, and if the finance company is willing to reaffirm the debt with you, those car payments would remain the same, and that would be counted as one of your legitimate monthly expenses. The calculation of income minus expenses would put you into Chapter 7 territory. On the other hand, if you surrendered that car to the creditor too early, it would no longer be an expense, and your calculation would no longer put you into a Chapter 7. On top of all of that, in the exact same situation you would be able to file a Chapter 13, keep the car, and lower your monthly payments through the Chapter 13 process, and possibly save enough money to save some other secured item that you would otherwise have to surrender. Obviously, in this situation we would want to carefully consider all of your options, and all of your personal goals.

Another way to look at it is that in a Chapter 13 case you have an absolute right to keep secured property (such as your home, car(s), furniture, appliances, etc.), as long as you can make certain payments, but in a Chapter 7 you are risking losing some or all of those things. If you want to save the house or the car, and if we can make your numbers work, then you want to file a Chapter 13. If all you have is unsecured debt (medical bills, credit card debt, etc.), then you want to file a Chapter 7, if the numbers will permit it. Unfortunately, most factual situations are not that clear-cut, which is why it can sometimes become difficult to choose between the chapters.